During December, the unemployment rate dropped to 9.4%, according to the latest statistics [.pdf] from the Labor Department. The rate was at 9.8% during November. This 0.4% decline is the largest drop in the unemployment rate since April 1998, when the rate similarly declined 0.4%. Including December 2010, the unemployment rate has declined 0.4% or more 21 times since January 1948 (756 months ago). Moreover, 16 of these 21 declines came before December 1961. In other words, the unemployment rate has declined 0.4% or more only five times since December 1961 (5 of 589 months). Clearly, the December decline was unusual.
Despite the uncharacteristic decline in December, there were 113,000 jobs created in the private sector, while there were 10,000 fewer jobs in the government, which resulted with a gain of 103,000 jobs in December. Though, with an addition of only 103,000 jobs, many economists were surprised the rate fell 0.4%. Typically, the unemployment rate does not budge unless there is a fluctuation of about 200,000 jobs. For instance, there was a gain of 431,000 jobs last May [.pdf], which was mostly due to temporary workers of the US Census, but the unemployment rate only declined 0.2% (9.8% to 9.6%). As a result, the December decline was not solely a result of job growth, but instead involves two other key factors.
First, the number of individuals who are marginally attached to the labor force grew in December. Marginal attachment refers to individuals who are not employed and also have not actively looked for a job in the past 4 weeks, so they are not included in the unemployment rate. In December alone, there was a growth of 87,000 individuals to those marginally attached to the labor force. Additionally, there are currently 2.6 million individuals who are included in the marginally attached – the highest amount since record keeping began in 1948.
The second key factor that contributed to the December decline is seasonal adjustments, which involves the comparison of a month to the patterns of that month in the past. In December of 2008 [.pdf] and 2009 [.pdf], the number of employed individuals declined. As a result, a comparison of December 2010 to the past two years shows a noticeable boost in 2010.
Regardless of why the unemployment rate fell in December, the rate is at its lowest point since May 2009. Though, the unemployment rate has been above 9% for twenty consecutive months. This is the worst streak of unemployment since the Great Depression. Also, the December decline in the unemployment rate may be temporary. Since many individuals will perceive the December report as an improvement in the labor market, those individuals who are marginally attached to the labor force will likely begin looking for work again, which could cause the rate to rise.
However, the private sector has had positive job growth for eleven consecutive months. If the private sector continues to add jobs, it is possible for these gains to offset the marginally attached workers who re-enter the workforce. In addition to this positive trend of the private sector, the number of individuals who are applying for unemployment benefits are also declining. In fact, the four-week average for new unemployment claims is at its lowest point since August 2008, according to statistics released yesterday from the Labor Department. These positive trends in the labor market are good indicators, but the recovery of the US economy still requires a great deal of improvement in the domestic demand for labor.